terça-feira, 6 de janeiro de 2015

Martin Wolf: An economist's advice to astrologers

As the late John Kenneth Galbraith remarked: “The only function of economic forecasting is to make astrology look respectable.”

But that does not mean we can say nothing useful. One can at least identify economic trends and a few known unknowns

The world economy is extremely likely to grow. It has, after all, grown every year since the second world war, with the sole exception of 2009, the year of the global financial crisis, when it shrank 2 per cent at market exchange rates and remained roughly constant at purchasing power parity. The International Monetary Fund believes the world economy will grow at nearly 4 per cent, at PPP. This is a good starting point. It is also a remarkable one: at 4 per cent annual growth, the world economy doubles every 18 years.

We can also be fairly sure emerging economies will grow faster than high-income ones and Asian emerging economies — those of east Asia and south Asia — will grow fastest of all. This, too, has been a long-term pattern.

Asian emerging economies have grown faster than emerging economies as a whole in every year at least since 1980, even (though only just) in 1998, the worst year of the Asian financial crisis. Asian growth is decelerating, largely because of China’s slowdown. But it is still expected to run at an annual rate of above 6 per cent.

Emerging economies as a whole are forecast to grow at close to 5 per cent annually. Meanwhile high-income economies are expected to grow at a little over 2 per cent. The main reason emerging economies grow faster than the high-income ones is catch-up: the possibility of applying already existing knowledge. This potential is nowhere near exhausted. Barring some sort of catastrophe, this is likely to continue being the strongest force working on the world economy for many decades.

Among the high-income economies, it is also sensible to bet that the US will grow faster than Europe and Japan in any given year. This is partly because of its better demography and partly because of a faster technical progress.

How far, then, can we go beyond this to assess 2015 specifically?

Start with the possible positives.

Short-term forecasting always focuses on demand. But it is sensible to include supply. Economies with exceptional amounts of slack can grow faster than normal. Among high-income economies, those with most slack are those in the “peripheral” eurozone. These economies could now grow relatively quickly.

The improvement might even start in 2015, since long-term interest rates are low, private sector balance sheets are stronger and fiscal deficits are under control. If the European Central Bank pulled out all the stops, the rise in confidence might surprise.

Another positive supply shock would be a recovery in productivity growth in crisis-hit high-income economies, including the UK and US. That would only be a small surprise. A positive supply surprise might also be seen in India, which ought to be the world’s fastest-growing major economy over the next two or three decades.

Another helpful factor is persistently low inflation. This allows the monetary authorities to remain accommodative. Tightening in the US and UK is likely to be slow. In the eurozone and Japan, policy is even going in the opposite direction, since deflation fears remain strong. China is being driven to loosen, too, as its economy weakens.

The most important positive factor of all is the decline in oil prices. An interesting blog for the IMF argues that global output could be between 0.3 per cent and 0.7 per cent higher in 2015 as a result. Lower oil prices help by reducing headline inflation and raising real incomes of consumers. If prices remain low, this benefit could last for a while.

Now consider possible negatives. Experience suggests that a large financial crisis is the economic event most likely to disrupt global growth. The obvious risks would seem to be a financial meltdown in China, a collapse of the eurozone, or a severe crisis in emerging economies as the dollar strengthens, US interest rates rise and capital flees. Any of these seems conceivable.

But none seems that likely, largely because policy makers in all of these cases are likely to be able to manage the risks. The greatest danger would seem to be disintegration of the eurozone. This is a political project whose political underpinnings are fragile. Survival is likely. But it is not certain.

Another possible source of severe disruption would be a geopolitical shock. But it would have to be a large one. The Yom Kippur war of 1973 and Iraq’s attack on Iran in 1980 were closely associated with disruptive oil shocks. Yet more recent terrorist attacks have done no significant damage to the global economy. Conflict between great powers, a nuclear war in the Gulf or nuclear terrorism would be game changers. But direct conflict between great powers has not occurred since the Korean war. The economic results of proxy wars proved manageable during the cold war. One has to hope the same is true of the new cold war between Russia and the west.

Another year of quite decent global growth is, in brief, far and away the most likely outcome in 2015. It could even be a relatively good year, notably in the US. But — and this is a big but — deep structural challenges remain.

In particular, we continue to rely on central banks to manage what I have labelled “chronic demand deficiency syndrome”. The ultra-low interest rate environment is its most telling symptom. As China’s extraordinarily high investment rate falls, the demand deficiency is likely to worsen. Germany’s demand deficiency makes resolution of the eurozone crisis very difficult.

But central banks should be able to cope for another year. Happy New Year.